DOJ Opinion No. 090, s. 1984

DOJ OPINION NO. 090 , s. 1984 May 31, 1984 The Chief Legal Counsel Development Bank of the Philippines Makati, Metro Manila Sir : This has reference to your request for confirmation of your various opinions (Opinion Nos. 229, 152, 147 & 74, series 1982 ) to the effect that the Development Bank of the Philippines ("DBP") may impose interest and other charges on unissued certificates of stocks due to it from its debtor corporations. It appears that in line with DBP's rehabilitation and refinancing program for distressed accounts of certain hotel corporations unable to service its loan obligations, DBP and its debtor companies entered into arrangements whereby certain portions of the latter's outstanding obligations with the former shall be converted into preferred or common shares of stock of such firms in the name of the DBP. In this connection, the DBP Board of Governors adopted Resolution No. 4025-81 which would require the continued imposition of normal charges, such as interests, penalties and similar charges, on borrower-firms whose loans or portions thereof have been converted into shares of stocks in such firms until such time that the corresponding stock certificates are delivered to DBP, the jurisdiction being that the loans converted into equity come from DBP's borrowed funds for which interest is being paid by DBP. The aforesaid resolution which has been sustained by the above-mentioned opinions upholding the right of DBP to impose interest charges on unissued stock certificate, is being questioned by the borrowers concerned "primarily on the ground that the DBP can no longer charge interest on unissued stock certificates because from the date their obligations were converted into equity, the DBP became the legal and beneficial owner of the shares and entitled to all the rights pertaining to stockholders." It is also pointed out that the issuance of the stock certificates is not necessary to make one a stockholders. The DBP has taken the position that since the shares are being issued in payment of the firm's past-due obligations, the transactions are in effect, purchase of shares of stock, not subscriptions; the obligations therein created being reciprocal, the moment one of the parties fulfills his obligations, delay by the other begins, making him liable for damages. LexLib Subject to the extended discussion below, it is our view that the right of DBP to continue to collect interest and other charges on the obligations converted into equity depends upon the agreement of the parties as to the effective date of the conversion. There is no question that DBP intended to become a stockholders upon the acceptance of the conversion agreement by the borrower firms. From the effectivity date of the conversion, the DBP became a stockholders and lost the right to charge interests on the converted unpaid obligations. The signing of the agreement and compliance with the conditions set therein extinguished the creditor-debtor relationship between the parties. It is axiomatic that the stockholders is not a creditor of the corporation (Campos & Campos, Comment on the Corporation Code, pp. 633-634; Garcia vs. Lim Chu Sing, 59 Phil. 562; 14 C.J. p. 388, Sec. 511; p. 848, Sec. 1289). Under the Corporation Code, a subscription contract is a contract "for the acquisition of unissued stock in an existing corporation or a corporation still to be formed" (Sec. 60). The acquisition of shares may be financed by the equity conversion of the borrower-firms' obligations which by law is valid consideration for the issuance of corporate shares. (Sec. 62[4] Idem) It is not necessary to be labor the point about the legal distinction between a subscription and purchase or sale or unissued shares because the distinction between the two transactions no longer obtains under the New Corporation Code pursuant to Section 60 of which "any contract for the acquisition of unissued stocks in an existing corporations . . . shall be deemed a subscription . . . notwithstanding the fact that the parties refer to it as a purchase or some other contract." Moreover, the agreement are not strictly one or the other, being basically novations of the original loan obligations which should be governed by the term of the restructuring arrangements. Since there is no dispute that from the date of conversion, borrower's obligations are already considered extinguished, it is necessary to look into the agreement of the parties as expressed in the contracts to determine the date of effectivity of the conversion. LexLib We do not have the texts of all the agreement involved in the transaction covered by the query. We have the memorandum of the agreement with Manila Mandarin Hotel, Inc. (MMHI) and that with Manila Peninsula Hotel, Inc. (MPHI). It is noted that there is no provision unequivocally stating the effectivity date of conversion of the obligations into equity. The Memoranda of Agreement were agreements to convert a portion of the hotels corporations' outstanding obligations subject to certain conditions, among others, that the said corporation shall increase its authorized capital stock to enable it to issue the necessary common stock certificates, and that it shall secure the approval of the Securities and Exchange Commission for the purpose. The Memoranda of Agreement were therefore not meant to be self-executing because something more had to be done to consummate the conversion. Significantly, both the Memorandum of Agreement with Manila Mandarin Hotel, Inc. and that with Manila Peninsula Hotel, Inc. provided that "Upon receipt by DBP of such common shares" (Obviously referring to the stock certificates), the obligations covered by the conversion into common shares "shall be deemed and treated to have been liquidated" (par. 2 and par. 1, respectively). This clause, to our mind, is the only indication in the contracts of the intent of the parties to establish a reckoning date for the effectivity of the liquidation of the obligations thereby converted into equity. Until the obligations are liquidated by compliance with the obligation to deliver the share, it is not inappropriate to charge interests on the original obligation which subsists as loans until their conversion to stock ownership. It is true that as a general proposition, delivery of the certificate of stocks is not necessary to make one a stockholder since these certificates are merely evidence of ownership and of the rights and liabilities arising from such ownership. For a stock certificate is not the stock itself; "it is merely the muniment of title, but not the title itself." (Guevarra, Corporation Law. p. 189; US Cities Corporation vs. Sautbine, 259 p. 253; Fletcher Cyclopedia Corporations, Vol. 11, p. 50) It is well settled, as a general rule of corporation law that, in the absence of statutory or charter provision or agreement to the contrary, a subscriber for a stock in a corporation or a purchaser of stock becomes a stockholder as soon as his subscription is accepted by the corporation, and statutory or charter conditions are performed or fulfilled, or as soon as the purchase is completed, as the case may be, whether a certificate of stock is issued to him or not, and although he may have no certificate, he is thereupon entitled to all the rights, and is subject to all the liabilities of a stockholders. (SEC Opinion dated December 16, 1983 citing 11 Fletcher 5094). Thus, the parties may agree to the contrary, and fix a specific date or event for the completion of the purchase or subscription. This is especially true where as in this case, the consideration for the stocks are unpaid subsisting obligation, and the increase in capital stock and securing SEC approval and delivery of the shares of stock are obligations imposed on the debtor-firms. As above intimated, the various agreements of the parties, which do not appears to be in standard form, will have to be examined on a case to case basis, to determine the date of the effectivity of the liquidation of the original loan obligations and their conversion into equity participation. Thus, if the agreement covering the conversion into equity stipulated the effectivity date or the event or condition precedent for the completion of the liquidation of the loan obligation and their conversion to equity, it is not inappropriate for the DBP to continue to charge interest on the original obligation which subsists as a loan until its conversion to stock ownership. LexLib Please be guided accordingly. Very truly yours, (SGD.) RICARDO C. PUNO Minister of Justice